Montgomery County v. Federal Communications CommissionMontgomery County v. Federal Communications Commission
KETHLEDGE, Circuit Judge.
In this case we have one set of regulators litigating against another. Over the last ten years, the Federal Communications Commission has рublished three written orders that together establish a series of rules governing how local governments may regulate cable companies and cable services. Several local governments have petitioned our court to review the FCC’s two most recent orders, arguing among other things that the FCC misinterpreted the Communications Act,
I.
A.
Our opinion in Alliance for Community Media v. FCC, 529 F.3d 763 (6th Cir. 2008), sets forth the relevant history of the Communications Act and cablе regulation generally. In short, the Act regulates the way cable services, which include video programming, reach viewers nationwide. Under the Communications Act, cable companies may provide cable services only if their local or state governmental authorities (which we call “franchising authorities“) grant them a “cable franchise.”
As a condition of granting a franchise, local government authorities may demand, among other things, that a cable operator provide certain services or equipment for public, educational, or governmental purposes. See
The FCC is аuthorized to make “such rules and regulations as may be necessary” to carry out the purposes of the Communications Act.
B.
In early 2007, the FCC issued an order establishing several new rules designed to encourage competition in the cable markets by allowing applicants for a cable franchise to get franchises more easily. See Implementation of Section 621(a)(1) of the Cable Communications Policy Act, 22 FCC Rcd. 5101 (March 5, 2007) (hereinafter First Order). These rules barred franchising authorities from, among other things, imposing unreasonable demands on franchise applicants or requiring new cable operators to provide non-cable services. Alliance, 529 F.3d at 771 & n.6. In that same order, the FCC also read narrowly the phrase “requirements or charges incidental to the awarding ... of [a] franchise” as used in
Meanwhile, the FCC sought comment on whether it should expand the application of some of the First Order’s rules—which applied only to new applicants for a cable franchise—to incumbent cable providers as well. See Implementation of Section 621(a)(1) of the Cable Communications Policy Act, 72 Fed. Reg. 13230-01 (proposed March 21, 2007) (to be codified at
Several local governments and franchising authorities (whom we call the “Local Regulators“) then petitioned this court for review of the Second Order and the Reconsideration Order. The United States
II.
The Local Regulators challenge five aspects of the Second Order and the Reconsideration Order. In some of those challenges, the Local Regulators argue that the FCC interpreted the relevant statutory provisions incorrectly; in others, the Local Regulators argue that the orders were entered in violation of the Administrative Procedure Act. As to the interpretative challenges, if the relevant statutory text is unambiguous, “we give effect to Congress’s answer without regard to any divergent answers offered by the agency or anyone else.” Hadden v. United States, 661 F.3d 298, 301 (6th Cir. 2011). But if the statute is “silent or ambiguous” on the question presented, then we determine “whether the agency’s answer is based on a permissible construction of the statute.” Id. (citation omitted). As for the APA challenges, we determine whether the agency rules at issue are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
A.
The Local Regulators challenge the FCC’s interpretation of “franchise fee” as defined by
Specifically, the Local Regulators challenge the FCC’s inclusion of (i) non-cash exactions and (ii) cable-related exactions (as opposed to exactions unrelated to the provision of cable service) in the FCC’s interpretation of “franchise fee.” By wаy of background, the FCC stated in its First Order—which again applied only to new applicants for a cable franchise, i.e., “new entrants“—that the incidental “requirements or charges” covered by § 542(g)(2)(D) (and thus not counted toward the five-percent cap for a franchise fee) are only the requirements or charges expressly enumerated in that provision. That order also stated, in relevant part, that “[e]xamples of other items” that do count toward the cap “include application and processing fees that exceed the reasоnable cost of processing the application, acceptance fees, free or discounted services provided to an LFA [i.e., local franchising authority], any requirement to lease or purchase equipment from an LFA at prices higher than market value, and in-kind payments as discussed below.” First Order ¶ 104. The order did not define “in-kind payments“—though, as examples of them, it cited “a request for video hookup for a Christmas celebration and money for wildflower seeds in New York[.]” Id. ¶ 107. But the order did conclude that “any requests made by LFAs that are unrelated
So now we turn to the challenges themselves. As an initial matter, the FCC and the Intervenors argue that the Local Regulators’ challenges to the FCC’s inclusion of noncash and cable-related exactions in its interpretation of “franchise fee” are barred by res judicata, because, the FCC says, our court rejected those same challenges in Alliance. But there are two problems with that argument. First, the relevant part of our opinion in Alliance analyzed (and approved) only the FCC’s interpretation of the term “incidental” as used in § 542(g)(2)(D). See 529 F.3d at 783. The opinion nowhere analyzed or approved the idea that every cost or expense that a cable operator bears in complying with the terms of its franchise is a “franchise fee” under § 542(g)(1). Hence we have not in fact already decided the issues presented here. See Georgia-Pac. Consumer Prods. LP v. Four-U-Packaging, Inc., 701 F.3d 1093, 1098 (6th Cir. 2012). Second, the First Order did not make clear that cable-related exactions are franchise fees under § 542(g)(1). Indeed, the FCC itself told us the contrary was true: in opposing a motion to stay its First Order during the pendency of the Alliance appeal, the FCC told this court that the First Order’s “analysis of in-kind payments was expressly limited to payments that do not involve the provision of cable service.” Opposition of Federal Communications Commission to Joint Motion for Stay Pending Judicial Review, 2007 WL 2041325, at *14 n.16 (emрhasis in original). And for good reason: the First Order rather pointedly concluded that exactions ”unrelated to the provision of cable services” are franchise fees, First Order ¶ 105 (emphasis added), which yields a plain negative inference that, so far as the First Order was concerned, exactions that are related to the provision of cable services are not franchise fees. The FCC responds that this interpretation of its First Order renders its reference to “free or discounted services” in ¶ 104 of the Order superfluous in light of the FCC’s reference in the same paragraph to “in-kind payments as discussed below.” But that assumes that these (undefined) terms have some objectively discernable meaning as used in the Order—which they do not. The FCC’s current (as opposed to prior) interpretation of the First Order on this point is therefore plainly erroneous. See In re AmTrust Fin. Corp., 694 F.3d 741, 754 (6th Cir. 2012).
Thus we turn to the merits of the two challenges. First, the Local Regulators and their amici argue that noncash exactions are not “franchise fees” under § 542(g)(1)—because that section defines franchise fees as a “tax, fee or assessment[,]” and those things are almost always monetary in nature. But § 542(g)(1) more specifically defines “franchise fee” to include “any tax, fee, or assessment of any kind[,]” (emphasis added), which requires us to give those terms maximum breadth. And the terms “tax” and “assessment,” in particular, can inсlude nonmonetary exactions. The definition of “tax,” for example, includes “a burdensome charge, obligation, duty, or demand.” The Random House College Dictionary 1347 (rev. ed. 1982); see also Black’s Law Dictionary 106-07 (5th ed. 1979) (“[a]n enforced contribution of money or other property ... [or] any con
That the term “franchise fee” can include noncash exactions, of course, does not mean that it necessarily does include every one of them. The Local Regulators argue that “franchise fee” does not include “in-kind” cable-related exactions in particular. On that point the Local Regulators offer two contentions, one substantive and one procedural. The substantive argument is that the FCC’s interpretation of franchise fee would undermine various provisions of the Act that allow or even require the Local Regulators to impose cable-related obligations as part of their cable franchises. For example, the Local Regulators may require “that channel capacity be designated for public, educational, or governmental [or “PEG“] use,” and that “channel capacity on institutional networks [or “I-Nets“] be designated for educational and governmental use[.]”
The FCC’s Second Order and Reconsideration Order do not reflect any consideration of this concern, which leаds to the Local Regulators’ second contention: that those orders contain scarcely any explanation at all for the FCC’s decision to expand its interpretation of “franchise fee” to include so-called “in-kind” cable-related exactions. We agree with that contention. The Second Order says nothing at all in support of this expansion. And the Order on Reconsideration merely asserts that its First Order had already treated “in-kind” cable-related exactions as franchise fees, and that our court had approved that treatment in Alliance. See Recon. Order ¶¶ 11-13. As explained above, however, both assertions are wrong. Thus, the FCC has offered no explanation as to why the statutory text allows it to treat “in-kind” cable-related exactions as franchise fees. The FCC likewise has offered no explanation as to why the Local Regulators’ structural arguments are, as an interpretive matter, incorrect. And apart from a fleeting reference in the Reconsideration Order, the FCC has not even defined what “in-kind” means.
“One of the basic procedural requirements of administrative rulemaking is that an agency must give adеquate reasons for its decisions.” Encino Motorcars, LLC v. Navarro, — U.S. —, 136 S. Ct. 2117, 2125 (2016). Thus, if an agency wants the federal courts to adopt (much less defer to) its interpretation of a statute, the agency must do the work of actually interpreting it. The FCC’s orders reflect none of that work as to the question whether “in-kind” cable-related exactions are “franchise fees” under § 541(g)(1). We therefore vacate, as arbitrary and capri
B.
The Local Regulators next challenge the FCC’s so called “mixed-use” rule, which in essence states that local franchising authorities can regulate only the provision of cable services over “cable systems” as defined by the Act. See Second Order ¶¶ 16-17; see also
By way of background, the infrastructure that supports cable services—which the Act refers to as “cable systems“—can also support at least two other kinds of services: “telecommunications services[,]” such as telephone service offered directly to the public, and “information services[,]” such as certain internet add-on applications and other ways to make information available via telecommunications. See generally
The Local Regulators’ biggest concern about the mixed-use rule—and the biggest indicator, in their view, that the rule is wrong—is that it apparently would prevent them from regulating so-called “institutional networks,” or “I-Nets.” Institutional networks provide various services to non-residential subscribers, rather than just video services to residential subscribers (which is all that the mixed-use rule seems to allow local franchising authorities to regulate). See
The FCC now concedes that its mixed-use ruling was not meant to prevent local franchising authorities from regulating institutional networks. And that concession, the Local Regulators say, resolves “90 percent” of their concern about the mixed-use rule. But that still leaves a dispute about whether local franchising authorities can regulate other services, like “information services” as defined by
The Communications Act bars franchising authorities from regulating the “services, facilities, and equipment provided by a cable operator except to the extent consistent with” the Act.
The Local Regulators admit that the FCC’s mixed-use decision is “defensible as aрplied to Title II carriers,” since the Act expressly states that local franchising authorities may regulate Title II carriers only to the extent they provide cable services. See
Where the trouble began, in the Local Regulators’ view, is in the FCC’s Second Order, which applied the mixed-use rule to incumbent cable operators—most of whom are not Title II carriers, and thus to whom § 522(7)(C) does not apply. The FCC’s statutory basis for the mixed-use rule in the First Order, therefore, does not by its terms support the FCC’s extension of the mixed-use rule to incumbent cable operators in the Second Order. Yet the FCC chose not to cite any other statutory basis for its аpplication of the mixed-use rule to incumbent providers in the Second Order. See Second Order ¶¶ 16-17.
Instead, the FCC merely relied on the First Order’s statutory interpretation of § 522(7)(C), noting that § 522 “does not distinguish between incumbent providers and new entrants.”
In sum, the FCC’s оrders offer no valid basis—statutory or otherwise—for its application of the mixed-use rule to bar local franchising authorities from regulating the provision of non-telecommunications services by incumbent cable providers. Thus, on the record now before us, the FCC’s extension of the mixed-use rule to incumbent cable providers that are not common carriers is arbitrary and capricious. See Teva Pharm. USA, Inc. v. Food & Drug Admin., 441 F.3d 1, 5 (D.C. Cir. 2006). We therefore vacate the mixed-use rule as applied to those incumbent cable operators, and remand for the FCC to set forth a valid statutory basis, if there is one, for the rule as so applied.
C.
We make shorter work of the Local Regulators’ remaining three arguments.
1.
The Local Regulators argue that the FCC should have preempted, in its Second Order, so-called “most-favored-nation” (“MFN“) clauses in franchise agreements. By way of background, in the First Order the FCC invalidated so-called “level-playing-field” rules, which were state or local rules that barred franchising authorities from granting new cable franchises on terms that were better than those in existing franchise agreements. See First Order ¶ 138. The FCC also forbade franchising authorities from unreasonably denying a new franchise based on an applicant’s inability to meet certain excessive requirements. For example, franchising authorities could not require “a franchisee [to] deploy cable services to all households in a given franchise area” within an unreasonably short timeframe. Alliance, 529 F.3d at 771 & n.6. In the Second Order, the FCC recognized that these parts of the First Order might permit some “competitive
According to the Local Regulators, the FCC’s decision to strike down the level-playing-field rules while leaving the MFN clauses in place will create a downward spiral that the Regulators rather vaguely say is “inconsistent” with the Act. The downward spiral, as the Local Regulators see it, has two steps. In the first step, the First Order will cause new entrants to obtain better terms than incumbent operators have. In the second step, the incumbents’ MFN clauses will entitle them to those better terms. The Local Regulators assert that this cycle would repeat with each new franchise granted, causing a downward spiral and eventually preventing authorities from making reasonable demands of franchisees.
The theory presumes that the First Order effectively requires franchising authorities to give every new wave of cable providers a better deal than the last. But the First Order does not do that. Instead it merely allows franchising authorities to give better terms to new entrants if they so choose, so long as the authorities impose only reasonable requirements. Meanwhile, nothing prevents franchising authorities from refusing to agree to MFN clauses when incumbent franchises come up for renewal. See Second Order ¶ 20; Recon. Order ¶¶ 8-10. Nor have the Local Regulators provided any evidence, as opposed to speculation, that the FCC’s decisions in this area will somehow thwart Congress’s intent as expressed by the Act’s plain terms. Moreover, analysis of these kinds of market dynamics is primarily the FCC’s province, not ours. See Wis. Pub. Power, Inc. v. FERC, 493 F.3d 239, 260-61 (D.C. Cir. 2007). Nor, suffice it to say, was the FCC’s decision on this point arbitrary and capricious in any way. Hence we reject this challenge to the FCC’s orders.
2.
The Local Regulators next argue that the FCC should make clear that the Second Order does not bind state franchising authorities (аs opposed to local ones). But the FCC has already made that clear, by expressly stating that the Second Order was “intended to apply only to the local franchising process, and not to franchising laws or decisions at the state level.” Recon. Order ¶ 7.
Still, the Local Regulators worry about the following footnote in the Reconsideration Order:
Nothing in this Order on Reconsideration, of course, changes the fact that in litigation involving a cable operator and a franchising authority, a court anywhere in the nation would be required to apply the FCC’s interpretation of any provision of [the Communications Act] that would be pertinent (e.g., [
47 U.S.C. § 542 ]), including those interpretations set forth in the First Report and Order and Second Report and Order.
The Local Regulators misread the footnote, which merely makes the jurisdictional point that district courts cannot review the substantive validity of the FCC’s orders. See
Moreover, the FCC’s decision not to regulate, and thus to leave a gap in its regulatory regime, is not arbitrary and capricious. Agencies may “proceed one step at a time[.]” Cincinnati Bell Tel. Co., 69 F.3d at 767. And the FCC has offered to undertake a future rulemaking, if requested, to consider whether its orders should apply to state-level franchises. See Recon. Order ¶ 7. Hence this challenge, to the extent it is one, is meritless.
3.
Finally, the Local Regulators argue that the FCC’s Supplemental Final Regulatory Flexibility Analysis (which it attached to the Reconsideration Order) was defective because it putatively failed to meet the “purely procedural” requirements of the Regulatory Flexibility Act. See Nat’l Tel. Co-op. Ass’n v. FCC, 563 F.3d 536, 540 (D.C. Cir. 2009) (alteration and citatiоn omitted). Under the Act, an agency must publish, for each rule that it promulgates, a “final regulatory flexibility analysis” that assesses the rule’s effects on “small entities” and describes any steps the agency has taken to “minimize the significant economic impact” on them. See
Here, the FCC identified specific comments that raised the same objections that the Local Regulators now raise in the petition. And the FCC explained that, in its view, its rules in the relevant orders would “not impose a significant impact on any small entity” because the FCC “did not disturb many portions of the existing franchise requirements, such as MFN clauses, build-out requirements, time limits for franchise negotiations or customer service laws.” Recon. Order at App’x ¶ 16. The agency’s analysis of the relevant orders’ effects upon small entities was procedurally adequate. See Nat’l Tel. Co-op. Ass’n, 563 F.3d at 540. And to the extent that the Petitioners argue that the FCC’s regulatory analysis made its other rules arbitrary and capricious, we have dealt with those arguments above.
* * *
We grant the petition in part, deny it in part, and remand to the agency for further proceedings consistent with this opinion.